You would like to invest $20,000 for a year in a risk-free investment. A convent

Question

You would like to invest $20,000 for a year in a risk-free investment. A conventional CD offers a 4.6% annual rate of return. You are also considering an "Inflation-Plus" CD which offers a real rate of return of 22% regardless of the inflation rate. a. What is the implied (expected) inflation rate? (Round your answer to 2 decimal places.) Implied inflation rate b. You decide to invest $10,000 in the conventional and $10,000 in the Inflation-Plus CD. What is your expected dollar value at the end of the year? Expected value $ 20.920 C. Which of the two CDs is a better investment if the actual inflation rate for the year turns out to be 22%? O Inflation-Plus CD turns out to be a better investment Conventional CD turns out to be a better investment Hints References eBook& Resources Type here to search

Explanation / Answer

a. implied inflation rate = 4.6 - 2.2 = 2.4%

b. Here as we are taking expected inflation rate is 2.4% so both of the instruments will provide same amount.

so, Expected dollar value= 2 * 10000 * 104.6 = $ 20920

(c) Here if inflation rate is 2.2% s the Inflaton -plus CD will provide only 4..4% return so we can say that conventional CD will give better return.

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